This matter is before the court on defendant
Paymentech=s Motion for Partial Summary Judgment and the
plaintiff=s response.Paymentech seeks judgment on the issues of whether and to what extent
the plaintiff may recover Achargeback@ amounts.Paymentech asserts that there is no genuine issue as to any material
fact, and that it is entitled to judgment as a matter of law on these
issues.This court has jurisdiction of
this matter pursuant to 28 U.S.C. ' 1334(b);
it is a core proceeding pursuant to 28 U.S.C. ' 157(b)(2)(F).

Prior to the filing of its petition in January 1999,
the debtor entered into a Credit Card Processing Services Agreement (Athe agreement@)
with First USA Merchant Services, Inc., to collect cash for the credit card
purchases of its goods by consumers. (Paymentech states in its memorandum that
First USA Merchant Services, Inc. changed its name to Paymentech Merchant
Services, Inc. and uses the assumed name Paymentech.)Pursuant to the agreement, Paymentech received funds from the
banks that issued credit cards to the consumers, for the debtor=s sales of goods to them.From these funds, Paymentech deducted its processing fees and any
refunds due customers for returned or other disputed items (Achargebacks@),
and then transmitted the remaining amount to the debtor as net proceeds for its
credit card transactions.The agreement
provided for Paymentech=s creation of a reserve account containing funds that
were otherwise payable to the debtor for credit card purchases of its
merchandise.

Prior to and after the petition date, Paymentech
deducted from funds otherwise payable to the debtor for credit card purchases
of its merchandise, chargebacks and other adjustments.After the petition date the debtor continued
to operate its business as debtor-in-possession and to generate credit card
transactions for the purchase of its merchandise by consumers.After the petition date, and without
obtaining prior court approval, Paymentech deducted at least $382,754.80 from
its reserve account or from other funds otherwise payable to the debtor, in
order to process chargebacks.

The plaintiff initiated this proceeding by the filing
of its complaint on January 25, 2001, alleging that Paymentech=s deductions of chargebacks from funds it held in the
reserve account constituted an unauthorized post-petition transfer pursuant to
11 U.S.C. ' 549(a); that Paymentech unlawfully converted
portions of the debtor=s funds in the reserve account to its own use; and
that Paymentech willfully violated the automatic stay by exercising control
over the funds held in the reserve account.The plaintiff asked the court to enter an order imposing a constructive
trust restoring ownership of the funds in the reserve account to the debtor;
avoiding the post-petition payment of chargebacks from the reserve account
pursuant to ' 549; and requiring Paymentech to return the sum
of $382,754.80, plus interest, pursuant to ' 550(a).

Paymentech filed its answer on March 12, 2001,
asserting that the credit card purchases made by the debtor=s customers resulted in provisional credits to the
debtor, and that reversal of provisional credits was not an unauthorized
transfer, conversion, or violation of the automatic stay; that since the credit
on each transaction was provisional, the funds against which the chargebacks of
post-petition transactions were made were never funds belonging to the debtor;
that all chargebacks were in the nature of recoupment and not subject to the
automatic stay; that Paymentech had a security interest in all the debtor=s assets, as well as a security interest in the
reserve account to secure the payment of any and all chargebacks Paymentech
received against the debtor=s account; and
that the debtor=s failure to issue credits is a violation of
Regulation Z of 12 C.F.R., Part 226.12(e) and other federal law.

Paymentech filed its Motion for Partial Summary
Judgment on June 1, 2001.In its
memorandum in support, Paymentech contends that the chargebacks are not
avoidable pursuant to ' 549(a) and do not violate the automatic
stay.Section 549(a)(1) provides in
pertinent part that Athe trustee may avoid a transfer of property of the
estate made after the commencement of the case and ... that is not authorized
... by the court.@Property of
the estate is comprised of Aall legal or
equitable interests of the debtor in property as of the commencement of the
case.@11 U.S.C. ' 541(a)(1).Property of the estate includes A[p]roceeds,
product, offspring, rents, or profits of or from property of the estate...[a]nd
any interest in property that the estate acquires after the commencement of the
case.@11 U.S.C. ' 541(a)(6), (a)(7).Paymentech contends that the funds held in the reserve account
were not Aproperty of the estate@ because the debtor did not exercise control over them.

Paymentech argues that the terms of the agreement
prevented the debtor from having any interest in funds in the reserve account
until funds were paid to it.The
agreement defines the reserve account at &2
as

an
account that we may establish on our records for our accounting requirements
and benefit pledged by you to secure payment to us of any and all amounts which
may be due from you to us and for the benefit of your CARDHOLDER
customers.Any and all funds credited
to the RESERVE ACCOUNT may be comingled (sic) with our general funds, and will
be subject to disbursement only by us.You have no interest in the reserve amount until your receipt
thereof.The reserve amount shall
secure our PROCESSING FEES and any other sums as may be due to us, CHARGEBACKs,
and CREDIT NET AMOUNTs and the claims of CARDHOLDERs arising from CARD SALEs,
and you hereby grant to us a security interest in all funds in our possession
at any time.

The
agreement deals with the reserve account at &21
which provides:

In the
event of the occurrence or threat of a material, adverse change in your
financial condition or of another event as the result of which we, in our sole
discretion, deem ourselves insecure or have reasonable grounds to believe that
we may be liable to third parties for credit extended to you or that you may be
liable to your customers for any reason whatsoever, we shall have the right (a)
to immediately place payments due you in the RESERVE ACCOUNT and/or stop
processing transactions for you until such time as the extent of your
obligation to us, our liability to third parties and your liability to your
customers is known and we no longer deem ourselves insecure and (b) to demand
from you an amount that our experience dictates to assure payment of such liability.Your failure to pay such amount shall allow
us to terminate this AGREEMENT immediately and without notice.

Terms
in favor of Paymentech notwithstanding, case law supports the conclusion that
the funds referred to in the agreement constituted an Ainterest of the debtor in property.@

The issue of whether funds in a reserve or escrow
account were property of the estate was considered by the court in World
Communications, Inc. v. Direct Mktg. Guar. Trust (In re World Communications,
Inc.), 72 B.R. 498, 500-01 (D.Utah 1987).There the court stated:

Pertinent
case law demonstrates that even rights of redemption, accounts receivable,
reserve accounts, and other similar kinds of interests are considered property
of the estate under ' 541(a)(1).(Footnotes omitted).Trusts and
escrows are less obvious, however, and must be considered individuallywith respect to the circumstances of each.

Escrow accounts are more difficult to
diagnose.Factors that are relevant,
although not necessarily determinative, include whether the debtor initiated
and/or agreed to the creation of the escrow, what if any control the debtor
exercises over it, the incipient source of it, the nature of the funds put into
it, the recipient of its remainder (if any), the target of its benefits, and
the purpose for its creation.(Footnote
omitted).

In
applying these elements to the case before it the court went on to conclude
that

the
escrow account in question constitutes property of the estate.The reasons for this are as follows.First of all, on the face of the written
contract between the parties ... there are a number of indications that the
escrow fundsare incipiently, or at least
ultimately, assets of WCI.Page two of
the contract defines >escrow account= as
an account to be >set up in (WCI=s)
name for the benefit of (WCI=s) customers.=Paragraph 18
states that the account will be made up of >payments
due (WCI).=

Secondly, the evidence ... indicates that
DMGT created the escrow account by withholding funds that otherwise would have
been transmitted to WCI as proceeds from the sale of its products.In substance, therefore, the escrow account
constitutes a form of conduit for WCI=s
proceeds. These proceeds are temporarily within the control of DMGT for the
purpose of processing chargebacks, but are clearly distinguishable from actual
earnings or profits of DMGT.

Id.This
court quotes this case at length because it is instructive here.

It is clear from the face of the agreement between
Paymentech and the debtor here that funds withheld and placed in the reserve
account were funds generated by credit card sales of the debtor=s merchandise.Further they were funds which otherwise would have been transmitted to
the debtor as proceeds of such sales.The definition of reserve account includes the statement that the
account may be set up Afor the benefit of your CARDHOLDER customers.@Absent its
contractual relationship with the debtor, Paymentech would have no claim on
these funds.It, like the processing
entity in World Communications, is a conduit which had the debtor=s proceeds temporarily in its control.Paymentech has argued that the reserve
account funds were not property of the estate because the debtor did not
control them pursuant to the terms of the agreement.Control is an element to be considered in regard to the
application of the Aearmarking@
doctrine, the second prong of Paymentech=s
argument.Paymentech cites Musso v.
Brooklyn Navy Yard Dev. Corp. (In re Westchester Tank Fabricators, Ltd.),
207 B.R. 391 (Bankr. E.D.N.Y. 1997) in support of its position in regard to
this issue.

There, after the filing of the Chapter 11 case, the
principal of the debtor prevailed upon an entity owned by his family to
pay$100,000.00 which the debtor owed
to the defendant. A check for this amount was made payable directly to the
defendant and hand-delivered.In
addition to this payment, five monthly payments for post-petition use and occupancy
were made to the defendant from the debtor=s
DIP account.The trustee sought to
avoid all these transfers pursuant to ' 549.The defendant argued that the earmarking
doctrine constituted a defense to unauthorized post-petition transfers in both
instances.The court explained that

[t]he
earmarking doctrine ... provides that the transfer of funds by a third party
for the specific purpose of paying the debtor=s obligation to an existing creditor is ... not preferential where the
third party is merely substituted as creditor, and the debtor=s assets and net obligations otherwise remain the same
(citations omitted).Funds transferred
under these circumstances are deemed to be >earmarked,= and not a component of the debtor=s overall assets, as their transfer did not diminish
the amount available for distribution to creditors (citations omitted).

Id.
at 397.The court held that the transfers from the DIP checking account
were of property of the estate and that the earmarking doctrine did not
apply.The court agreed with the defendant,
however, that the earmarking doctrine applied to the $100,000.00 post-petition
transfer.

The court found that the debtor never had any control
over the disbursement of the funds in question as payment to any other creditor
but the defendant:

Here,
the Debtor had truly no control over the disbursement of the ... check because
only one creditor, the Defendant, could have received the proceeds.The funds were >earmarked=
for use in satisfaction of the obligation to a specific creditor and never part
of the estate available for distribution to all creditors.Accordingly, the transfer was not of
property of the estate and not avoidable.

Id. at 398.Paymentech maintains that exactly the same elements are present
here.The court disagrees.Here there was no transfer by a third party
of funds or assets specifically designated to satisfy debts to particular
creditors of the debtor.Paymentech
took control of funds generated by credit card sales of the debtor=s merchandise, funds in which the debtor had an
interest and which would otherwise have been available for distribution to all
creditors.These were not earmarked
funds.

Paymentech also contends that it was authorized to set
off the reserve account pursuant to 11 U.S.C. ' 553(a).That subsection
recognizes a creditor=s right Ato
offset a mutual debt owing by such creditor to the debtor that arose before the
commencement of the case...@Both debts must arise before the
commencement of the case and be truly mutual.Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1537
(10th Cir. 1990).Paymentech maintains
that the mutuality of debt requirement is met because the responsibilities of
the parties to each other were set out in the agreement before the commencement
of the case.Paymentech concedes,
however, that if the funds were property of the estate it was obliged to seek
relief from the automatic stay before exercising any right of set-off. 11
U.S.C. ' 362(d).See
Shugrue v. Chemical Bank, Inc. (In re Ionosphere Clubs, Inc.), 177 B.R. 198
(Bankr. S.D.N.Y. 1995).The court has
already determined the funds were property of the estate, and Paymentech may
not rely on setoff as a defense without having obtained relief from the stay.

Paymentech was required to seek relief from the
automatic stay before effecting any post-petition transfer.A creditor may not Atak[e] any action to obtain possession of property of
the estate or of property from the estate or to exercise control over property
of the estate@ once the bankruptcy petition is filed.11 U.S.C. ' 362(a)(3).A creditor may
not pursue Aany act to collect, assess, or recover a claim against
the debtor that arose before the commencement of the case ....@Id. at
' 362(a)(6).As set out in Martino v. First Nat=l Bank of Harvey (Matter of Garofalo=s Finer Foods, Inc.), 186 B.R. 414, 435-36 (N.D.Ill. 1995):

The
automatic stay has dual purposes.It
protects the debtor from its pre-petition creditors by stopping >all collection efforts, all harassment, and all
foreclosure actions= while permitting the debtor >to attempt a repayment or reorganization plan...=(Citation
omitted).It similarly protects all
creditors by ensuring that the estate will be preserved against attempts by
other creditors to gain an unfair advantage with respect to the payment of
claims (citations omitted).The purpose
of the stay is thus not confined to pre-petition debts...Rather, it protects
and preserves the value of a chapter 11 estate against post-petition creditors
who, without court approval, seek to take the property of the estate in
satisfaction of their post-petition claims (footnote omitted).

Paymentech then goes on to argue, however, that the
chargebacks were also in the nature of recoupment not subject to the automatic
stay.The court in In re Ruiz,
146 B.R. 877, 880 (Bankr. S.D.Fla. 1992), set out the basics of recoupment:

While
setoff under ' 553 is limited to instances involving mutuality
of obligation, the doctrine of recoupment simply requires the claims to arise
from the same transaction, and that the amounts recouped not exceed the amount
of the original sum owed.(Citation
omitted.)

Several bankruptcy decisions have applied
the doctrine of recoupment.In the Waldschmidt
case, Singer George Jones made several records for CBS corporation.CBS had advanced Jones royalties prior to
the bankruptcy filing in anticipation of future earnings from his albums.The district court held that the
post-petition royalties which resulted from Jones= pre-petition work product could be withheld by CBS, until the full
advancement had been recovered.The
court determined that the post-petition royalties did not relate to any
post-petition effort by Jones.The
royalties were based exclusively on the pre-petition work product which he had
created.Waldschmidt v. CBS, Inc.,
14 B.R. at 314-315.

While
there may be merit in Paymentech=s
contention that its deduction of funds from the reserve account arose from the
same transaction as the debtor=s claim to the
funds, i.e., the contract embodied in the agreement, Paymentech has not
demonstrated that it advanced funds to the debtor pre-petition which it then recouped
post-petition.In fact, setoff rather
than recoupment is applicable where a creditor appropriates funds for
chargebacks.See In re Ionosphere
Clubs, 177 B.R. at 206.As set out
above, however, Paymentech is foreclosed from setoff for present purposes as it
failed to get relief from the stay.

Paymentech=s final argument is that the debtor violated the
provisions of the Federal Trade Commission Act, 15 U.S.C. ' 45(a)(1), Regulation Z, 12 C.F.R. Part 226(e),
and the Mail and Telephone Order Merchandising Rule found at 16 C.F.R. Part
435, in failing to timely issue credits and engaging in transactions causing
chargebacks to occur.As Paymentech
states, these are consumer protection provisions.Paymentech was not a consumer of the debtor=s merchandise, and this court doubts that Paymentech
has standing to assert these provisions.Further, Paymentech makes only a vague, unsupported argument that
chargebacks should be allowed if only to prevent the plaintiff from benefitting
from the debtor=s Aillegal@ conduct.The
court dismisses this argument out of hand.

In consideration of all of the foregoing, it is the
opinion of this court that Paymentech=s
Motion for Partial Summary Judgment on the issue of whether, and to what
extent, it may recover chargeback amounts should be overruled.